Fears over fraud and bad loans at two US regional banks sparked a global sell-off in banking shares, causing jitters in stock markets worldwide before some recovery later in the day. The incident highlighted underlying concerns about risk management and lending standards in the financial sector.
On Thursday, Western Alliance Bank and Zions Bank disclosed significant issues, with Zions announcing a $50 million write-off on two loans and Western Alliance filing a lawsuit over alleged fraud. These revelations immediately raised alarms about potential weaknesses in the US banking system, particularly among regional lenders. Investors reacted swiftly, fearing that these problems could indicate broader sectoral issues, given the recent history of financial stress.
The news triggered sharp declines in banking shares across global markets on Friday. In the UK, major institutions like Barclays and Standard Chartered saw their stock prices drop more than 5% during morning trading, contributing to a 1.5% intraday fall in the FTSE 100 index before it closed 0.9% lower. European markets followed suit, with Germany’s Deutsche Bank ending the day 6% down and France’s Societe Generale falling 5%, while key indices in Germany and Paris recorded losses of 1.8% and 0.2%, respectively.
Asian markets had already experienced declines earlier in the day, with Japan’s Nikkei index closing 1.4% lower and Hong Kong’s Hang Seng dropping 2.5%. The sell-off reflected a knee-jerk reaction among investors, who often respond to banking sector troubles anywhere in the world by reducing exposure to financial stocks. However, the panic was not uniform, as some markets showed resilience amid the turbulence.
Despite the initial downturn, partial recoveries emerged by the afternoon. Shares in the affected US banks, such as Zions and Western Alliance, rebounded slightly, with Zions up about 4% after a 13% fall the previous day and Western Alliance gaining nearly 2%. In the US, the S&P 500 index edged higher, supported in part by comments from former President Donald Trump suggesting that high tariffs on China might not be sustainable, which eased some trade-related anxieties.
Expert commentary underscored the market’s concerns. Russ Mould, investment director at AJ Bell, noted that ‘pockets of the US banking sector including regional banks have given the market cause for concern,’ pointing to questions about poor risk management and loose lending standards. He emphasized that while there was no evidence of issues with UK-listed banks, investors tend to react strongly to any signs of trouble in the sector, reflecting broader unease.
The event occurs against a backdrop of heightened financial vulnerabilities, including recent failures of firms like car loan company Tricolor and car parts maker First Brands. These collapses have raised doubts about the quality of deals in the private credit market, where non-bank lenders provide loans to companies. Jamie Dimon, CEO of JPMorgan Chase, warned that such incidents could signal more problems ahead, using the analogy that ‘when you see one cockroach, there are probably more,’ urging caution among market participants.
Additional factors contributing to market nerves include warnings about an artificial intelligence investment bubble and overvalued stocks, with Dimon among those highlighting these risks. The turbulence drove investors toward safe-haven assets, pushing gold to a record high of $4,380 per ounce and causing the VIX volatility index, often called the ‘Fear Index,’ to reach its highest level since April. This flight to safety indicates persistent uncertainty about economic stability.
Looking forward, the White House’s National Economic Council director expressed confidence in the banking sector’s ample reserves, but the episode underscores ongoing fragilities. Investors remain vigilant for further signs of stress in private credit or geopolitical developments, which could influence market dynamics. The recovery in some areas suggests temporary relief, but the underlying issues may require closer monitoring to prevent broader financial disruptions.